South Balkan oil transit

Jan 06, 2003 01:00 AM

All but forgotten, the South Balkan region lacks visibility and urgency. And so pipeline planners need to keep their
chins up and persevere. Their best argument is the need to bypass the ecologically sensitive Bosporus Straits.
At present, all east-west oil transit is conducted by tankers. But new Turkish regulations are making it both more
difficult and expensive for shippers in the Bosporus. A pipeline bypass, supporters say, would increase profitability
and preclude the danger of mishaps.

Today's oil pipelines are virtually indestructible. Composed of thick steel pipe buried 12 feet underground,
protected by state-of-the-art coating technology, and regulated by a myriad of shut-off valves, pipelines are more
environment-friendly. For example, the AMBO route (from Bourgas, Bulgaria through Macedonia to Vlore, Albania) would
have automatic shut-off valves every kilometre.
"If the system senses a drop in pressure, the valves close," says AMBO Vice President Gligor Tashkovich. "In a
worstcase scenario, assuming one break point, the most oil that could leak would be 612,000 litres (161,700
gallons)."
Also, terrorist attacks are unlikely -- buried pipelines can't be located without inside information. "Besides,"
states Tashkovich, "there would be video monitoring and military guarding the whole corridor."

Another argument for pipelines is transit fees, which countries through which the pipeline passes like. But if the
Bosporus requires a cost-efficient bypass, why not build it on Turkish soil? Having coastline on both the Black and
Aegean seas, a European Turkey pipeline would be shorter and incur less transit fees. Norway's Statoil proposed such
a pipeline in 1994 -- but found dredging the harbours a Sisyphean labour, as strong currents returned heavy deposits
of silt.
The Latsis Group's Christos Dimas, chief of the Bourgas-Alexandroupolis project, told that "while it was politically
in American interests to have a major oil route (BTC) through Turkish territory, they don't want Turkey to monopolize
all the routes." Other industry experts debate this argument.

Regarding cost, Dimas contends that "our studies and the studies of major oil companies in the 1990's proved that
there is almost no cost difference between a European Turkey route and ours. Besides, unlike European Turkey we have
an excellent existing refinery (Bourgas) and better ports." Herein lies the question of infrastructure -- which has
its own challenges and benefits.
Most secure is Burgas' Neftochim refinery, acquired by LUKoil in 1999. Martin Ganev, deputy general manager in
Bulgaria, says the company will continue heavy investment.
"We view LUKoil Neftochim Burgas' infrastructure as part of future regional projects... these investments are
expected to reach $ 192 mm by the end of 2002 -- a threefold growth over last year."

Russian support helps enhance Bulgaria's prestige. The country is stable, reforming and pro-Western. Albania has for
a decade received millions of dollars in American aid. While still reforming, the country at least remains
predictable in its unpredictability. However, infrastructure is the problem here. The country has three dilapidated
refineries of which only one is operational -- barely. To get from Bourgas to Vlore, of course, AMBO must pass
through Macedonia -- which remains somewhat of an unknown commodity.
On Nov. 27, it was reported that lingering fears of violence in Macedonia following the 2001 war are still keeping
investors away. This analysis, which cited anonymous "observers," failed to mention that AMBO wouldn't traverse areas
affected by the long-ended conflict. Strangely, it also alleged that Albania suffered a "resulting upheaval" from the
war next door -- something that never happened. Misplaced fears of violence shouldn't deter investors in either
country.

Indeed, reminds Tashkovich, "oil companies operate in far more dangerous areas of the world than Macedonia." He
recalls an old statement from Lucio Noto, former chairman of Mobil: "Oil is found neither in multicultural,
pluralistic societies, nor in beachfront resorts."
The only thing to be leery about here is Macedonia's litigious spirit, specifically, the unresolved dispute over
Skopje's OKTA refinery. Unlike Albanian refineries, OKTA works. The only danger -- for both AMBO and any possible
pipeline continuation -- is the ongoing furore over the 1999 privatisation that gave 54 % of the state-owned refinery
to Hellenic Petroleum.

The highly controversial sale sold OKTA at a low price ($ 32 mm), and reduced crude oil tariffs from 20 % to 1 %.
According to government spokesman Saso Colakoski, this has caused Macedonia losses of up to $ 120 mm since 1999. And
despite completing a 230-mile Thessaloniki-Skopje pipeline, Colakoski said recently, Hellenic hasn't followed through
on other promised investments. Hellenic was allowed to monopolize oil imports -- meaning that Macedonia was
essentially frozen out of its own market.
Another Greek company, Mamidoil-Jetoil, then sued OKTA, claiming that it unfairly abrogated a 10-year contract to
accommodate Hellenic. A London court has ruled that Macedonia must pay up. The cash-strapped government may
relinquish its minority share in lieu of payment. Mamidoil-Jetoil expects from $ 2-12 mm in restitution.

In a recent interview, Mamidoil-Jetoil chairman Kyriakos Mamadakis claimed that the 1993 contract granted his company
"the right of precedence in regards to the refinery supply with raw oil." Mamadakis also maintains that the
Thessaloniki-Skopje pipeline is "an old and good idea... if we assume that the refinery shall refine 2 millions of
tpy."
However, this amount now hovers between 600,000-700,000 tpy. Mamadakis believes that it will decrease further, and
that transport costs will rise precipitously. The pipeline has also meant major work losses (48 %) for Macedonian
Railway, which formerly transported raw oil.
Significantly, OKTA owner Hellenic itself is 25 % owned by Balkan-hungry LUKoil. Of course, in the end it all comes
down to funding- and that means attracting investors.

AMBO President Ted Ferguson is optimistic. "I do agree that strategically speaking, the Balkans are no longer at the
forefront of US priorities. This has slowed business down," Ferguson told. "But I'm optimistic we'll advance the
funding." Dimas also believes, with Ferguson, that his project will find funding. Indeed, Bourgas-Alexandroupolis is
further along because of strong Russian commitment and harmonious country relations (AMBO was slowed in 1998-99 by
Bulgaria's non-recognition of Macedonia's name).
"Personally, I think that our pipeline has the strongest possibility," says Dimas, who nonetheless concedes, "the
decision will be taken mainly by the oil shippers. Anyway, it is too early to talk about investment -- these projects
have to confront other priorities first." Both pipelines have already shown their regional and environmental value.
However, in the end the name of the game is cold hard cash.

Can these eminently worthy projects really capture the interest of investors? John Roberts, chief editor with Platts
Energy Group, offers the following wry observation:
"There is an inherent contrast," cracks Roberts, "between projects that are good ideas and need backers, and projects
that have backers."
Only the future will show whether South Balkan oil projects can make the leap from the first category to the second.